Better Credit Card Rewards Increase Debt

Uh oh, Canadians beware. Lately Americans have overtaken their Northern neighbors when it comes to savings versus spending. Canadians have more per-capita consumer debt than their US counterparts. Canadians can’t help but overspend what they earn despite the economic climate.

Turns out that credit cards are part of the problem. A team of economists from the Federal Reserve Bank of Chicago wrote a paper on the increase in consumer debt as a result of better credit card rewards. Here is their paper.

Their results are perhaps not entirely correlated between better rewards and higher debt (increased credit card usage). What they found is that individuals actually paid their balance off slower, perhaps an indicator of the overall health of the economy where people are having difficulty meeting financial obligations.

For most, any benefit from better cash back rewards was negated by increased overall spending. That’s why credit card companies don’t mind cash back, consumers end up spending more than they would if they didn’t have cashback!